Functional competencies and their effects on performance of manufacturing companies in Vietnam

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Functional competencies and their effects

on performance of manufacturing companies in Vietnam

Thesis

presented to the Faculty of Economics and Social Sciences at the University of Fribourg (Switzerland)

in fulfillment of the requirements for the degree of Doctor of Economics and Social Sciences

by

Thi Mai Anh NGUYEN from Vietnam

Accepted by the Faculty of Economics and Social Sciences on 3^rd November, 2008

at the proposal of

Prof. Dr. Rudolf Grünig (First Advisor) and

Prof. Dr. Eric Davoine (Second Advisor)

Fribourg, Switzerland 2008

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The Faculty of Economics and Social Sciences at the University of Fribourg neither approves nor disapproves the opinions expressed in a doctoral thesis.

They are to be considered those of the author (Decision of the Faculty Coun- cil of 23 January 1990).

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Abstract

The manufacturing industry plays a key role in Vietnam (due to its labour advantage), generating jobs, contributing to social and political stability, and adding high value exports to help the balance payment. As Vietnam becomes more and more active in its pursuit of global economic integration, the entry of many foreign giants into its own domestic market will surely intensify the competition. Recognizing the importance of functional competencies to the firm’s performance will help the companies improve its competitiveness. In addition, many researchers had emphasized the importance of an integrative perspective study. Therefore, this study integrates four functions to investi- gate relationship between four functional competencies and firm performance of manufacturing companies in Vietnam.

To address these issues, a field survey of manufacturing companies in Viet- nam was conducted with the use of structured questionnaires and mail survey.

A total of 725 questionnaires were sent by mail to manufacturing companies.

Consequently 125 questionnaires were mailed back at gross response rate of 17.24%. The sample composed of 63.6 per cent limited or joint-stock companies, 27.3 per cent state-owned enterprises and 9.1 per cent foreign capital organizations. Various data analysis procedures were applied including factor analysis, descriptive analysis, single regression and multiple regression in order to accomplish the objectives of the study.

The findings identified four set of items of functional competencies namely manufacturing, marketing, research & development (R&D), and human resource and two set of items of organizational performances called profitability and market performance. All of these factors had high loadings (all above 0.541) and high reliability (all above 0.794), indicating internal consistency.

Although these dimensions retain a certain degree of similarity with others found in previous studies elsewhere, this collection of dimensions offers typi- cal features of manufacturing companies in Vietnam.

It found that in general, manufacturing companies in Vietnam do not perform very well their four functions: manufacturing, marketing, research & development and human resource. This expected result came from a long period where production and consumption were all planned and distributed by the Government.

It was discovered that seven hypotheses out of eight were supported by the empirical research and there were no unexpected results. The study confirmed that those manufacturing companies in Vietnam putting more emphasis on

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marketing, research & development and human resource competencies can expect to earn higher profitability and market performance. The study also found the positive and significant relationship between manufacturing competency and profitability. These findings are consistent with some previous studies.

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Acknowledgement

There are many people that I would like to thank for supporting and helping me complete this study.

First and foremost, I would like to express special thank and sincere gratitude to my first supervisor, Prof. Dr. Rudolf Gruenig, Chair of Management for his invaluable guidance, helpful comments, and continuous encouragement throughout the dissertation. He has provided a huge contribution toward the refinement of all the chapters.

I would like to extend my sincere thanks to Prof. Dr. Eric Davoine, Chair HRM / Organisation for his review and comments. My special thanks to Prof.

Dr. Dirk Morschett, Chair for International Management for his kind accep- tance to be Chairman of my PhD defense.

Sincere thanks also go to Swiss Development Corporation (SDC) and the Swiss- AIT-Vietnam (SAV) programme for granting the scholarship for this PhD program. I am thankful also to Dr. Hans Stoessel – Director of SAV and all SAV’s staff for their kind supports throughout the process of my study.

I would like to extend my sincere thanks to Mrs. Phuong Tu for her assistance in formatting the thesis and dealing with all the administration works.

Finally, I would like to reserve the deepest thanks to my beloved family: my parents, my husband - Anh Tuan, my son - Tuan Thanh and my little daughter - Mai Linh for their tremendous encouragement, understanding, and continuous love during my long and hard journey in achieving the doctoral degree.

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List of figures

Figure 2.1: Conceptual framework underlying the literature review ... 9

Figure 2.2: The impact of efficiency, quality, customer responsiveness and innovation on unit costs and prices ... 25

Figure 3.1: A conceptual model of the relationship between functional competencies and firm performance ... 46

Figure 4.1: Positions of the respondents ... 62

Figure 4.2: Location of the surveyed organizations ... 62

Figure 4.3: Enterprise ownership of the surveyed organizations ... 63

Figure 4.4: Industry types of the surveyed enterprises ... 64

Figure 4.5: Age of companies ... 64

Figure 4.6: Number of employees in the surveyed organizations ... 65

Figure 4.7: Total assets of the surveyed organizations ... 66

Figure 4.8: Revenue of the surveyed enterprises ... 66

Figure 4.9: Profit of the surveyed enterprises ... 67

Figure 4.10: Human resource management ... 80

Figure 4.11 : Marketing management ... 86

Figure 4.12: Manufacturing management ... 91

Figure 4.13: Research & development ... 96

Figure 4.14 : Profitability performance ... 99

Figure 4.15: Market performance ... 102

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List of tables

Table 2.1: The production roles in achieving competitive advantage ... 27

Table 2.2: The marketing roles in achieving competitive advantage ... 28

Table 2.3: The R&D roles in achieving competitive advantage ... 29

Table 2.4: The human resource roles in achieving competitive advantage ... 30

Table 2.5: The material management roles in achieving competitive advantage ... 30

Table 2.6: The information system roles of different value creation in achieving competitive advantage ... 31

Table 2.7: The infrastructure roles in achieving competitive advantage ... 32

Table 2.8: Performance measures used in empirical competitive advantage research ... 34

Table 2.9: A summary of findings of previous studies ... 36

Table 3.1: KMO and Barltlett’s test for functional competencies and performance ... 55

Table 3.2: Test of normality of the data set ... 56

Table 3.3: Reliability analysis of functional competencies and organizational performance... 58

Table 4.1: Guidelines for identifying significant factor loadings based on sample size ... 68

Table 4.2: The first run of factor analysis (n=110) ... 70

Table 4.3: The second rotated factor solution (n=110) ... 72

Table 4.4: The third rotated factor solution (n=110) ... 74

Table 4.5: The fourth loaded factor solution (n=110) ... 75

Table 4.6: The first run of factor analysis (n=110) ... 78

Table 4.7: Human resource management ... 80

Table 4.8: Means of human resource activities in different locations ... 82

Table 4.9: Means of human resource activities and different types of ownership ... 83

Table 4.10: Mean scores of human resource activities in different types of industry ... 84

Table 4.11: Marketing management ... 85

Table 4.12: Means of marketing activities in different locations ... 87

Table 4.13: Means of human resource activities and different types of ownership ... 88

Table 4.14: Means of marketing activities in different industries ... 89

Table 4.15: Manufacturing management ... 90

Table 4.16: Means of manufacturing activities in different locations ... 92

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ownership ... 93

Table 4.18: Mean of manufacturing activities in different industries ... 94

Table 4.19: Research and development ... 95

Table 4.20: Means of research and development activities in different locations ... 96

Table 4.21: Means of research and development activities and different types of ownership ... 97

Table 4.22: Mean of research and development activities in different industries ... 98

Table 4.23: Mean of profitability performance ... 99

Table 4.24: Means of profitability performance in different locations ... 100

Table 4.25: Profitability performance and different types of ownership ... 101

Table 4.26: Mean of profitability performance in different industries ... 101

Table 4.27: Mean of market performance ... 102

Table 4.28: Means of market performance in different locations ... 103

Table 4.29: Market performance and different types of ownership ... 104

Table 4.30: Mean of market performance in different industries ... 104

Table 4.31: Correlations for functional competencies ... 105

Table 4.32: Correlation for performance measures ... 106

Table 4.33: Correlation for functional competencies and performance ... 106

Table 4.34: Single regression model summary ... 108

Table 4.35: Multiple regression model summary ... 114

Table 4.36: Rank by mean of competitive items of four functions ... 118

Table 4.37: Summary of hypothesis testing ... 120

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List of abbreviations

APEC Asian Pacific Economic Cooperation ASEAN Association of South-East Asian Nation CA Competitive Advantage

CEO Chief Executive Officer d.f. Degree of Freedom EPS Earning Per Share

FDI Foreign Direct Investment GDP Gross Domestic Product

HRM Human Resource Management KMO Kaiser-Meyer-Olkin

KS Kolmolorov-Smirnov

MKT Marketing

MNF Manufacturing

PE Price Earnings

R&D Research and Development ROA Return on Asset

ROC Return on Capital ROE Return on Equity ROI Return on Investment ROS Return on Sales

SCA Sustainable Competitive Advantage S.D. Standard Deviation

SOE State Owned Enterprise TQM Total Quality Management USD American Currency

VCCI Vietnam Chamber of Commerce and Industry WTO World Trade Organization

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1 Introduction

1.1 Background

Why do some companies perform well, while others do not? Do the functional competencies of the firm have any influence on the success or failure of the firm? To what extent do the different functions play a role in the growth and performance of a single manufacturing company? These are the major questions that will be addressed in this study.

Strategies are formulated to determine the way in which organizations can move from their current competitive position to a stronger one. This can only be achieved by improving specific functional competencies (Feurer et al, 1994).

A study conducted by Porter (1985) showed that companies that achieved international leadership employed strategies that took advantage of their distinctive competencies. These competencies included designing new products, in- stalling new production technologies, adapting training programs, using quality control techniques, and improving supplier relationships (Li, 2000).

Vietnam has experienced significant economic progress since doi moi “eco- nomic renovation” in 1986. These achievements have been reflected in the strong average gross domestic product (GDP) growth rate of 8.5% from 1990 to 1997. Despite the impact of the regional financial and economic crisis, Vietnam still managed a growth rate of 4.7% (Statistical Yearbook of Viet- nam, 1999, p. 20). The average growth rate from 2000 - 2005 was as high as 7.5% and last year, the growth rate of GDP reached 8.43% (Statistical Year- book of Vietnam, 2005, p. 59). Imports and exports have increased since 1994, as has the trade balance. The export volume has risen from 11.5 billion USD in 1999 to 32 billion USD in 2005, with an average annual growth rate of 18.6% (http://www.vietpartners.com/Statistic.htm, August 15, 2006).

Since the introduction of doi moi in late 1986, Vietnam has become increas- ingly more integrated into the regional and world community. As the first step, Vietnam joined the league of the Association of South-East Asian Na- tion (ASEAN) in July 1995 and later became a member of the Asian Pacific Economic Cooperation (APEC) in November 1998. Currently, Vietnam is in the process of joining the World Trade Organization (WTO). So far, Vietnam has concluded relationships with over 100 countries and economic organizations worldwide. As Vietnam becomes more and more active in its pursuit of

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global economic integration, the entry of many foreign giants into its own domestic market will surely intensify the competition. Officials astutely ask

‘what can Vietnamese companies do to compete with imported goods and services, while also becoming a successful exporter?’ The answer: Vietnam- ese companies will have to become more competitive (Quang, 2001).

The manufacturing industry plays a key role in Vietnam (due to its labour advantage), generating jobs, contributing to social and political stability, and adding high value exports to help the balance payment. According to the statistical yearbook 2005, the output value of manufacturing sector in Vietnam has grown phenomenally from 158 trillion VND in 2000 to 353 trillion VND in 2005, an average growth rate of 17.5%. Clearly, the manufacturing sector plays a dominant role in Vietnam’s economy, as its contribution increased from 79.72% in 2000 to 84.91% of total GDP in 2005 (Statistical Yearbook of Vietnam, 2005).

The literature indicates that there is a strong relationship between competitiveness sources and enterprise’s performance. Some studies also show that different competitiveness sources (such as manufacturing, research and development, and marketing) have different impacts on performance results (Droge et al, 1994; Li, 2000; Hitt and Ireland, 1985). However, most of these studies have been conducted in a developed countries context. Very few studies have been done for developing countries as well as none in Vietnam.

1.2 Objectives of the Study

The purpose of this study is to identify the relationship between four functional competencies and firm performance of manufacturing companies in Vietnam. It also provides a deeper understanding the role of these four functional competencies to improve the firm’s performance. The specific objectives of this study are:

§ To identify the underlying dimensions of the four functional competencies

“manufacturing, marketing, research & development, and human resource”

in manufacturing companies in Vietnam.

§ To assess the competency level of four functions: manufacturing, marketing, research & development, and human resource in manufacturing companies in Vietnam

§ To empirically test the relationship between the dimensions of manufacturing competencies and the firm’s performance of manufacturing companies in Vietnam.

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§ To study the relationship of marketing competencies with the firm’s performance in Vietnam’s manufacturing sector.

§ To examine the relationship of the research & development competencies with a firm’s performance in Vietnam’s manufacturing sector.

§ To test the relationship between the human resource competencies and firm’s performance in Vietnam’s manufacturing sector.

§ To provide the recommendations.

1.3 Rational for the Study

This research is meaningful for several reasons, given the problems and questions posed above.

First, several researchers have noted the need to empirically examine the relationship of functional competencies on the firm’s performance.

Second, even though substantial research already exists in this field, most of it has been conducted in a developed country context; few studies have been conducted for developing countries.

Third, this study has been devoted to the whole manufacturing sector.

Fourth, the results of the study would provide practical evidence to the manufacturing industry, especially the manufacturing in Vietnam. This study would help the manufacturing companies to recognize the importance of functional competencies to their firm performance. Managers of the manufacturing companies can use the findings from this study to implement the appropriate functional strategies and manage their organizational practices effectively.

1.4 Scope and Limitations of the Study

This study aims to clarify the relationship between functional competencies seen as source of competitive advantages and performance of manufacturing companies in Vietnam. Other sources of competitive advantages are beyond the scope of this study.

The study exclusively focuses on the relationship of four functional competencies with organization performance: manufacturing, marketing, research &

development, and human resource. Thus other functions and variables might

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have potential impacts, those relationships were not included in the scope of the study.

Since this study was based on the measurement of managers’ perception, a bias may occur in the survey. Therefore the results are observed as non- objective.

Due to limits of time and research funds, the survey reflects only the period of May to August, 2006.

Concerning the data collection, the research data concentrates on manufacturing firms provided by VCCI (Vietnam Chamber of Commerce and Industry) on their website http://danhba.vdc.com.vn. Companies participating in the study are mainly Vietnamese. Only a small number of joint venture and foreign companies participated in the survey, therefore the sample may not represent the whole of Vietnam’s manufacturing companies.

1.5 Structure of the Study

The study is organized into five chapters as follows:

Chapter 1: Introduction

This chapter provides the background, objectives and rational of the study.

The scope of the study and the structure of the study are also included.

Chapter 2: Literature review on functional competencies and their effects on performance

This chapter reviews the relevant literature on the research questions. It is divided into eight main sections. The first three sections review the strategy concept and the key terms: competitive advantage (CA). The fourth section reviews factors determining sustainability of CAs. The next section presents sources of CA, especially focusing on functional competencies. The sixth section describes the criteria used to measure the company performance. The seventh section summarises research about functional competencies and company performance. The last part is conclusions for the research.

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Chapter 3: Conceptual framework, measurement instrument develop- ment and data collection

This chapter consists of two main components: the conceptual framework &

hypothesis development, and measurement instrument development & data collection. The conceptual framework is proposed based on the literature review. Based on this framework, the hypothesis is presented. It then covers the measurement instruments, data collection, and data assessment.

Chapter 4: Data analysis and hypothesis testing

This chapter presents the data analysis and the statistical result from hypothesis testing in this study. At first, dimensions of functional competencies are identified through factor analysis. Then descriptive statistics are demon- strated. After that the hypotheses are tested and the results are then discussed and summarized at the end.

Chapter 5: Summary of findings and recommendations

This chapter provides the most important findings and contributions of the study. Limitations of the research are then discussed. Finally, ideas for future research are also proposed.

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2 Literature review on functional competencies and their effects on performance

2.1 Chapter overview

The purpose of this chapter is to provide a theoretical foundation that is relevant to the development of a conceptual model and hypotheses for this study.

It is organized into eight main sections: (1) the concept of strategy as frame;

(2) conceptual framework underlying the literature review; (3) key terms concerning competitive advantages (CAs); (4) conditions for sustainable CAs according to Hill and Jones; (5) Source of competitive advantage according to Hill and Jones; (6) Company performance; (7) Empirical Findings about Functional Competencies and Firm Performance; and (8) conclusions for research. The first section introduces the concept of strategy as frame of the research. The second section presents the conceptual framework underlying the literature review. The third introduces the key concepts in CAs. In this section, the relationships of resources, capabilities, competencies and competitive advantage are also presented. The third section reviews factors determining sustainability of CAs. The next section identifies sources of CA, especially focusing on functional competencies. The fifth section covers the criteria used to measure the company performance. The following section covers the previous research works looking at the linkage between sources of CA and company performance. The last part is conclusion for the research.

2.2 The concept of strategy as frame

The word strategy comes from the Greek origin word “strategia” meaning

“generalship” (Long and Vickers-Koch, 1995). In the 19th century, it was first used in reference to the science and art of employing political, economic, military and other forces to support the policies of a nation or group of na- tions. The word did not surface in management literature until the 1950s (Long and Vickers-Koch, 1995).

The amount of literature on strategy development is vast and growing at an accelerating rate. Despite the large amount of research on this subject there is no single approach for strategy development. As a result, a wide range of conceptual frameworks exists for the formulation and implementation of strategies (Feurer and Chaharbaghi, 1994).

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Peter Drucker appears to be one of the first to talk about the strategy in a business context. In 1954 he spoke about it only in terms of answering the question: “what is our business? And what should it be?” (Long and Vickers- Koch, 1995).

Chandler was one of the first to offer an explicit definition of strategy (Long and Vickers-Koch, 1995). Chandler (1962) defined strategy as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals (Decharin, 1999).

The first writers to focus on the concept of strategy in term of its development and implementation were Andrews and Ansoff (Long and Vickers-Koch, 1995). Andrews (1965) defined strategy as the pattern of objectives, purposes, goals, and major policies and plans for achieving the goals. Ansoff (1965) viewed strategy as a common thread for deciding on five components: market scope; growth vector (the direction in which scope was changing); competitive advantage (unique opportunities in term of product or market attributes);

synergy internally generated by a combination of capabilities or competencies; and the decision to make or to buy.

Henderson (1979) proposed that the fundamental rule of strategy is to induce competitors not to invest in those products, markets, and services where firms expect to invest most. To achieve strategic victories, firms must use corporate resources to substantially outperform a competitor with superior strength.

Strategy is a deliberate search for a plan of action that will develop a business’s competitive advantage and compound it.

Strategy is the direction and scope of an organization over the long term. It ideally matches its resources to its changing environment (Johnson and Scho- les, 1993).

In summary, there is no unique definition of strategy. According to the author, the definition offered by Chandler in 1962 is seen as a holistic one. The author will based on Chandler understand a strategy as the determination of the basic long-term goals and objectives of an enterprise, and the adoption of course of action and the allocation of resources necessary for carrying out these goals.

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2.3 Conceptual framework underlying the literature review The Figure 2.1 shows the framework which is underlying the literature research. The key points of this framework are highlighted as follow:

§ The distinctive competencies of an organization arise from two comple- mentary sources: its resources and capabilities.

§ A distinctive competency is unique strength that allows one company to achieve superior efficiency, quality, innovation or customer responsiveness and thereby to attain a competitive advantage.

§ The primary objective of company’s strategy is to achieve a competitive advantage.

§ Consequently, the company will earn a profit rate substantially above the industry average.

Details of these concepts and relationship are presented in the following sections.

Figure 2.1: Conceptual framework underlying the literature review (Source: Adapted from Hill and Jones, 2001, p.138)

Superior

§ Efficiency

§ Quality

§ Innovation

§ Customer responsiveness Distinctive

competencies

Capabilities

Company Perfor-

mance Competitive

advantages Resources

Functional Competen- cies

Special interest in the context of the thesis

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2.4 Competitive advantages

2.4.1 Term of competitive advantage

A universal and exact definition for competitive advantage (CA) does not exist.

Alderson (1965) was one of the first to recognize that firms should strive for unique characteristics in order to distinguish themselves from competitors in the eyes of the customers. He argued that differential advantage might be achieved through lowering prices, selective advertising appeals, and/or product improvements and innovations (Hoffman, 2000).

Hall (1992) asserted that for a business to succeed in a hostile environment it ought to either achieve the lowest cost or most differentiated position.

Henderson (1983) emphasized that organizations that are able to adapt best or fastest will gain an advantage relative to their competitors. The message to managers is to respond to changes in the business environment by providing the best option in terms of product/service or be the quickest to respond to the needs of the market (Yamoah, 2004).

Caves (1984) was among the first introduced “competitive advantage” but without explicit definition. Caves focuses on the commitment of resources to establish entry barriers that would enhance the performance of a firm (Flint, 2000).

Day (1984) discusses how to determine the value of competitive advantage in the market by relating it to benefits which must be perceived by a customer group that willing to pay for those benefits and cannot easily obtain those benefits elsewhere. In contrast to the competitive advantage terminology by Caves, this conception of competitive advantage appears to be linked to a firm’s being more competence in the market than its competitors (Flint, 2000).

Porter (1985) asserted that competitive advantage comes from the value that firms create for their customers that exceeds the cost of producing that value.

The key concern for a business is to capture that value which is greater than its cost. He also identified two types of competitive advantage, which were cost leadership and differentiation.

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Coyne (1986) suggested that because the meaning of competitive advantage is self-evident, there is no apparent need to define its exact meaning. However, he believed that differentiation based on key buying attributes of a product is the foundation of an advantage. This difference must be due to some resource capability that the firm possesses and competitors do not possess. Three conditions must be met for competitive advantage to have meaning: 1) that customers perceive differences between one firm’s product/service attributes and those of its competitors, 2) the difference is the result of a capability gap between the firm and its competitors and 3) that the aforementioned difference in attributes and the capability gap are expected to endure over time.

Hill and Jones (2001) suggested that competitive advantage means that a firm has gained an above-average return as compared to its competitors in its industry.

Barney (1991) tried to define competitive advantage with strategy view. He stated “a firm is said to have a competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors”.

According to Flint (2000), the definition of Barney is useful because it incor- porates the idea that creation of value, competition among firms, and the durability of that value are all fundamental to the conceptualization of sustainable competitive advantages. However, it does not explicitly link competitive advantages to the resulting financial performance of a firm.

In order to achieve competitive advantage, a company must implement a

“value creating” strategy (Barney, 1991). Value creation is measured by the difference between value to consumer and cost of production (Hill and Jones, 2001, Porter, 1985).

In summary, for the author a competitive advantage is given, if a company has an above-average return as compared to competitors (Hill and Jones, 2001). This definition of competitive advantage given by Hill and Jones (2001) is appropriate as it accumulates some concepts in competitive advantage literature, links competitive advantage to the performance of a firm and provides freedom to use other terms.

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2.4.2 Term of sustainable competitive advantage

The idea of a sustainable competitive advantage (SCA) surfaced in 1984, when Day suggested types of strategies that may help to “sustain the competitive advantage”. The actual term of “SCA” emerged in 1985, when Porter discussed the basic types of competitive strategies that a firm can posses in order to achieve a long-run SCA (Hoffman, 2000).

According to Barney (1991), a firm is said to have a sustained competitive advantage when it is implementing a value-creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy”. He asserted that “a competitive advantage is sustained only if it continues to exist after efforts to duplicate that advantage have ceased”.

Hill and Jones (2001) believed that a sustained competitive advantage is simply a competitive advantage that has been maintained for a number of years.

Flint (2000) suggests short-term and long-term competitive advantages.

Short-term competitive advantages which would last through a business cycle and long-term competitive advantages which would last over more than one business cycle. If there were a competitive advantage which was or had the potential of being over the entire length of the foreseeable future, then one could label that as an “unthreatened competitive advantage” (Flint, 2000).

Hoffman (2000) defines “SCA is the prolonged benefit of implementing some unique value-creating strategy not simultaneously being implemented by any current or potential competitors along with the inability to duplicate the benefits of this strategy”.

In conclusion, SCA is simply a CA that has been maintained for a period of time. The durability of competitive advantage depends upon the maintenance of the advantage, the ability of competitors to duplicate the advantage, or the ability of competitors to somehow obtain the benefits of the advantage.

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2.4.3 Conditions for sustainable competitive advantage according to Hill and Jones

According to Hill and Jones (2001), the durability of competitive advantage depends on three factors: barriers to imitation, the capability of competitors, and the general dynamism of the industry environment.

2.4.3.1 Barriers to imitation

A company with a competitive advantage will earn higher average profits.

These profits send a signal to rivals that the company is in possession of some valuable distinctive competency that allows it to create superior value. How quickly will rivals imitate a company’s distinctive competencies? This is an important question because the speed of imitation has a bearing upon the durability of a company’s competitive advantage. The critical issue is time. The longer it takes competitors to imitate a distinctive competency, the greater the opportunity the company has to build a strong market position and reputation with consumers, which is then more difficult for competitors to attack.

Barriers to imitation are a primary determinant of the speed of imitation. Bar- riers to imitation are factors that make it difficult for a competitor to copy a company’s distinctive competencies. The greater the barriers to such imitation, the more sustainable are a company’s competitive advantage.

Imitating resources is the easiest distinctive competencies for prospective rivals to imitate tend to be those based on possession of unique and valuable tangible resources because these resources are visible to competitors and can often be purchased on the open market. Intangible resources can be more difficult to imitate. Brand names are important because they symbolize a company’s reputation. Marketing and technological know-how are also important intangible resources. Technological know-how is protected from imitation by the patent system.

Imitating company’s capabilities tends to be more difficult than imitating its tangible and intangible resources. Since capabilities are based on the way de- cisions are made and processes managed deep within a company, it is hard for outsiders to disconcern them.

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To sum up, since resources are easier to imitate than capabilities, a distinctive competency based on a company’s unique capabilities is probably more dura- ble than one based on its resources.

2.4.3.2 Capability of competitors

According to work done by Ghemawat (1986), a major determinant of the capability of competitors to rapidly imitate a company’s CA is the nature of the competitor’s prior strategic commitments. When competitors already have long-established commitments to a particular way of doing business, they may be slow to imitate an innovating company’s competitive advantage (Hill and Jones, 2001).

Another determinant of the ability of competitors to respond to a company’s competitive advantage is their absorptive capacity – that is the ability of an enterprise to identify, value, assimilate and utilize new knowledge.

Taken together, factors such as existing strategic commitments and low absorptive capacity limit the ability of established competitors to imitate the CA of a rival, particularly when the CA derives from innovative products or processes.

2.4.3.3 Industry dynamism

A dynamic industry environment is one that is changing rapidly. The most dynamic industries tend to be those with a very high rate of production innovation. In dynamic industries, the rapid rate of innovation means that product life cycles are shortening and the CA can be very transitory.

In summary, the durability of a company’s competitive advantage depends on three factors: the height of barriers to imitation, the capability of competitors to imitate its innovation, and the general level of dynamism in the industry environment. When barriers to imitation are low, capable competitors abound, and the environment is very dynamic, with innovations being developed all the time, then competitive advantage is likely to be transitory. On the other hand, even within such industries, companies can achieve a more enduring competitive advantage if they are able to make investments that build barriers to imitation (Hill and Jones, 2001).

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2.5 Resources, capabilities and competencies 2.5.1 Term and categories of resources

The notion of resources was introduced into the strategic management field in the 1970s when Ansoff (1965) categorized skills and resources according to the major functional area, i.e. research & development (R&D), operations, marketing, general management and finance.

But until the mid 1980s did the concept of resources as a source of sustainable competitive become dominant in the strategic field. There has been resur- gence of interest in the role of the firm’s resources as the foundation for firm strategy.

The firm’s resources can be defined as stocks of available factors that are owned or controlled by the firm. The final products or services are produced by using a wide range of other firm assets and bonding mechanisms such as technology, management information systems, incentive system, trust between management and labour, and more (Amit and Schoemaker, 1993).

Grant (1991) defined resources as the inputs into the production process, which are the basis of analysis. To identify resources, financial balance sheets are notoriously inadequate because they disregard intangible resources and people-based skills – probably the most strategically important resources of the firm (Grant, 1991).

Barney (1986, 1991) also suggested that not all aspects of a firm’s physical capital, human capital, and organizational capital are strategically relevant resources. Some of these attributes do enable a firm to conceive of any implement strategies that improve its efficiency and effectiveness. Others may have no impact on a firm’s strategizing processes or may even have a negative ef- fect.

Porter (1991) confirmed that resources are not valuable in and of themselves, but because they allow firms to perform activities that create advantages in particular markets. Resources are only meaningful in the context of perform- ing certain activities to achieve certain competitive advantages.

Several resource level categorizations have been presented in the literature.

One of the most famous classifications of resources is that of tangible and intangible resources. Physical or tangible resources are normally obvious to

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firms, competitors, and customers. Intangible are less apparent to competitors and customers, or even the firm itself. Intangible resources include brand names; technological know-how; organizational capabilities embedded in a company’s routines, process, and culture; reputation; tacit design; production know-how; customer relationships; and organizational culture. (Collis and Montogomery, 1995; Goodman and Lawless, 1994).

In conclusion, resources can be defined as a firm’s financial, physical, human, technological, and organizational capital. They can be divided into tangible resources (land, buildings, plant, and equipment) and intangible resources (brand names, reputation, patents, and technological or marketing know-how).

2.5.2 Term and categories of capabilities

Capability has been used by many researchers as an alternative and substitute for “soft” resources to explain the notion behind a firm’s competitive advantage. Some researchers claim that resources cannot answer the question of sustainable competitive advantage caused by intra-firm factors, but that using capability as a unit of analysis can (Decharin, 1999).

Ansoff (1965) first used the term capabilities to describe a company’s ability to deal with different combinations of competitive environments and levels of entrepreneurial turbulence. Strategic capability was defined by Ansoff (1979) as a measure of effectiveness of firms in supporting a particular thrust.

Capabilities can be thought of as intermediate goods generated by the firm to provide enhanced productivity of its hard resources (Amit and Schoemaker, 1993). Capabilities could also be defined as a set of strategic business. Capa- bilities are strategic only when they begin and end with the customer. Capa- bilities are also collective and cross-functional (Stalk et al., 1992).

Capabilities are what a firm can do as a result of resource teams working together. A firm’s capabilities can be identified and appraised using a standard functional classification of the firm’s activities. For most firms, however, the most important capabilities are likely to be those which arise from an integration of individual functional capabilities (Grant, 1991).

Collis (1994) defined organizational capability as the socially complex routines that determine the efficiency with which firms physically transform inputs into outputs. This definition contains two important elements. The first is

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the notion that organizational capabilities embedded in the firm routines. The second important element of the definition is that it involves the transforma- tion of physical inputs into output inside the “black box” of the firm. In this role, capabilities function as the organizational complement to the technological determinants of the efficiency of production.

Ulrich and Lake (1990) defined organizational capability by linking it to the personnel aspect of the firm. Organizational capability is the ability of a firm to manage people to gain a competitive advantage. Building organizational capability focuses internal organizational processes and systems on meeting customer needs and ensures that the skills and efforts of employees are di- rected toward achieving the goals of the organization as a whole. In this way, employees become a critical resource for competitiveness that will sustain itself over time.

Teece et al., (1994) introduced the concept of dynamic capabilities, which emphasizes the development of management capabilities and inimitable combinations of organizational, functional, and technological skills. This concept examines the sources of competitive advantage and how the combination of competencies and resources can be developed, deployed, and protected. The term “dynamic” refers to the shifting character of the environment while the term “capabilities” emphasizes the key role of strategic management in ap- propriately adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competencies in a changing environment. To be strategic, capabilities must meet the customer’s needs, be unique, and be difficult to replicate.

Collis (1994) suggested that not all capabilities are sources of sustainable competitive advantages. The position of competitive advantage based on organizational capabilities are vulnerable to competitive actions on a number of dimensions, particular to being superseded by better and higher-older capabilities.

Long and Vickery-Koch (1995) had classified capabilities into three types based on their importance to the firm. They are threshold, critical and cutting- edge capabilities. Threshold capabilities or capabilities that is necessary just to be in the game. These include services to support internal customers as well as those skills and system that are conditions for doing business in the company’s industry. This type of capability could also be divided into support and basic capabilities. Critical capabilities are skills and system that are critical to customers and provide firms with today’s competitive advantage. Cutting-

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edge capabilities are skills and system that need to be nurtured and developed as sources of tomorrow’s competitive advantage.

Collis (1994) classified three types of organizational capabilities based upon the influence of capabilities on the organization. First are those that reflect an ability to perform the basic functional activities of the firm more efficiently than competitors. Second are capabilities that express the common theme of dynamic improvement to the activities of the firm. Third are capabilities that comprise the strategic insights which enable firms to recognise the intrinsic value of other resources or to develop novel strategies before competitors.

However Collis argued that it is difficult to make hard and fast distinctions among the three categories of capabilities since they all concern the ability of firms to perform an activity more effectively than competitors with otherwise similar resource endowments.

Leonard-Barton (1992) classified capabilities into four types: employee knowledge and skills; technical system; managerial system; and values and norms. Employee knowledge and skills are embodied in people, and are the most often related with core capabilities. Technical systems result from years of accumulating, codifying and structuring the tacit knowledge in people’s heads. Managerial systems represent formal and informal ways of creating knowledge and controlling knowledge. Values and norms are the values as- signed within the company to the contents and structure of knowledge and the means of collecting and controlling knowledge.

To sum up, capabilities refer to a company’s skills at coordinating its resources and putting them to productive use. Capabilities are intangible.

Unique capability is one that no competitor possesses.

2.5.3 Term and categories of competencies

Distinctive competence emerged in the 1960s as a desired end-result of business policies (Reed and Defillippi, 1990). The term distinctive competence, first used by Selznick (1957) to describe the character of an organization, refers to what a firm does especially well in relation to its competitors (Long and Vickers-Koch, 1995). Thus, distinctive competence is an aggregate of numerous specific activities that organizations tend to perform better than other organizations within a similar environment (Snow and Hrebiniak, 1980). Hofer and Schendel (1987) described distinctive competence as the patterns of resource and skill deployments that will help the firm achieve its goals and objectives.

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Distinctive competency is defined fairy uniformly in management literature and textbooks. Hill and Jones (2001) and Thompson and Strickland (1996) textbooks for strategic management agree on the distinctive competency definition as centering around the uniqueness and comparative performance of something arising within an organization in the light of organization’s competitors’ efforts (Flint, 2000).

According to Prahalad and Hamel (1990) core competencies are the collective learning in the organization, especially how to coordinate diverse production skills and integrate multiple streams of technologies. If core competence is about harmonizing streams of technology, it is also about the organization of work and the delivery of value. The force of core competence is felt as deci- sively in services as in manufacturing. Core competence is communication, involvement, and a deep commitment to working across organizational boundaries. It involves many levels of people and all functions. Core competence does not diminish with use but is enhanced as they are applied and shared. However, competencies still need to be nurtured and protected.

Knowledge fades if it is not used.

Thompson and Strickland (1996) suggested four traits of core competence.

First, core competence rarely consists of narrow skills or the work efforts of a single department. Rather they are composites of skills and activities per- formed at different locations in the firm’s value chain that, when linked, create unique organizational capability. Second, because core competence typi- cally originates in the combined efforts of different work groups and depart- ments, individual supervisors and department head cannot be expected to see building the overall corporation’s core competence as their responsibility.

Third, the key thing to leveraging a company’s core competence into long- term competitive advantage is concentrating more effort and more talent than rivals on deepening and strengthening these competencies. Fourth, because customers’ needs change in often unpredictable ways and the specific skills needed for competitive success cannot always be accurately forecast, a company’s selected bases of competencies need to be broad and flexible enough to respond to an unknown future.

Even though the concept of distinctive competence has been very popular in recent years, there are some weaknesses in this concept (Decharin, 1999).

Campbell at al. (1995) suggested that despite its powerful appeal, the core competence concept has not provided practical guidelines for developing and implementing strategy. Many companies have tried to define their core competence but lacking reliable analytical tools, few have achieved the clarity

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they sought. Furthermore, the core competence model does not account for the success of companies whose businesses have limited or no overlap.

Competencies are classified into various types by using various criteria.

They can be classified by the production process (Lado and Wilson, 1994):

§ Input-based competence encompasses the physical resources, organizational capital resources, human resources, knowledge, skills, and capabilities that enable a firm’s transformational processes to create and deliver products and services that are valued by customers.

§ Transformational competence describes organizational capabilities required to advantageously convert input into outputs. These capabilities include innovation and entrepreneurship, organizational culture, and organizational learning.

§ Output-based competence includes all knowledge-based, invisible strategic assets, such as corporate reputation or image, product or service quality, and customer loyalty.

According to Malerba and Marengo (1995), competencies can also be classified by their nature. Competencies can be classified along a series of con- tinua: tacit vs. articulable; not teachable vs. teachable; not articulated vs. articulated; not observable in use vs. observable in use; complex vs. simple; and an element of a system vs. independent.

Competencies can also be classified according to the sources which originate them. Competencies may derive from formal or informal sources. The formal encompasses all the resources which are invested with the main purpose of creating new competencies.

There is also a hierarchical classification of capabilities possible: strategic (or selective) capabilities; organizational (coordinating) capabilities; functional capabilities; and adaptive (learning) capabilities.

Hamel (1994) classified competencies by the impact that they have on the organization. Hamel distinguished three broad types of core competence:

§ Market-access competence, or all those skills which help to put a firm in close proximity to its customers, such as management of brand development, sales and marketing, distribution and logistics, technical support, etc.

§ Integrity-related competence, or competencies which allow a company to do things more quickly, flexibly or with a higher degree of reliability than

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competitors, such as quality, cycle time management, just-in-time inven- tory management, etc.

§ Functionality-related competence or skills which enable the company to endow its services or product with unique functionality, thus investing the product with distinctive customer benefits, rather than merely making it in- crementally better.

It is believed that functionality-related competence is becoming more important as a source of competitive differentiation, relative to the two competence types. This is because companies are converging around universally high standards for product and service integrity and are moving through alliances, acquisitions and industry consolidation to build broadly matching global brand and distribution capabilities (Hamel, 1994).

2.5.4 Summary

The shift in the strategic paradigm from the traditional Industrial Organization concept to a resource-based view has caused confusion among researchers and practitioners (Decharin, 1999). This confusion is caused by the differences in terminology and definitions within the resource-based view. There are various terms and definitions that illustrate the resource-based view of the firm such as: resource-based view, competence-based view, capability-based view. So far discussion about the domain of the resource-based view is marked by divergence and disagreement since key concepts, propositions, and terminology are only slowly being defined. Even though there are differences in terminology and definitions, all of the concepts emphasize the internal factors within the firm that contribute to sustainable competitive advantage.

The resource-based view theory was originally devised by Wernerfelt (1984), but only came to attention in recent years. Some researchers consider the resource-based view as an umbrella theory that encompasses both capabilities and competencies, but some researchers disagree with this idea. They argue that resources, capabilities, and competencies are different and individually important.

Even though resources, capabilities and competencies have been described separately and individually, they are all closely related to one another. From previous review, it should be apparent that in some circumstances these three concepts could be used interchangeably.

Functional competencies and their effects on performance of manufacturing companies in Vietnam